5.6. EDSR 07-14-2008 - Laserfiche WebLink

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Page 14 Commercial Real Estate Guide www.mrej.com r~ Spring 2008 Retail story this year is the survival of the fittest by Nanry Frykman he retail environment has certainly proven the old saying that the only thing constant is change. The economic turbulence of 2007 accelerated the retail market swing guest column from the boom of recent yeazs to a dramatic downturn by yeaz-end. While retail was-and is-the num- ber one casualty of change in our Twin Cities commercial real estate mazket, there is no need to panic. We're encoun- tering rough waters, not a tsunami. Chazles Darwin stated, "It is not the strongest of the species that survives, not the most intelligent, but the one most responsive to change." Our resilient retail will respond to this challenge in the com- ing yeaz by adapting strategies better suited to success in this new environ- ment. Looking back at 2007, retail was a mixed bag. To the good: Absorption was positive. At six percent, it was a slight improvement "over 2006. Nordstrom made its long awaited announcement to open a second Minnesota store. Both Wal-Mart and Tazget opened new stores and upgraded older stores into bigger and classier formats. Specialty retail cen- ters remained vibrant. The 50th. and France redevelopment attracted upscale retailers Sur la Table and Cos, both new to our mazket. To the bad: The' maid-yeaz sub-prime crash and its domino-effect hit retail with yet more aftershocks projected for this yeaz. Reduction became the byword for all sectors of 2007 retail-reduction in demand for retail space resulted from contraction across the retailer spectrum from nationals to franchisees to locals. Retail follows rnnftnne hnt when hr,,,~_ ing starts screeched to a halt, so did the outer metro expansron. Finally, we saw ongoing reduction in the number of planned retail projects. The main factors contributing to this decline were increased costs-up to 80 additional basis points, rising construc- tion costs, heightened bank underwriting standazds, and high land costs. Ray~isey Town Centre serves as the most glaring example of retail boom gone bust. As we look ahead to the lest of 2008, what opportunities await in our changed retail environment? In order to unlock opportunities, we need to understand the pazadigm shift that occurred last year. Making money has always been the goal over the life of our real estate loan by using Venture Mortgage. ~.- '': - ~, 1 ~-~ i ~ ~, Ridgedale Centers major renovations in 2007 helped it win two major victories when Nordstrom and Trader Joe's picked the property for new locations. of retail, but the "how" has shifted from "Where azen't we, and how fast can we get there?" to "Where can we maximize capital yield?" Retailers' business driv- ers transformed from capturing mazket shaze to maximizing capital yield by increasing selectivity on sites. Adopting strategies centered in cau- tion and creativity will be the key to pur- suing viable deals in our new retail envi- ronment. The ever-resilient retailer will respond in part through increased cau- tion and cazeful relocation. A major example is Wal-Mart's reduction of planned 2008 stores from 280 to 140-a pattern likely to spill into 2009. Retail- ers will relocate or close stores falling short of their profit tazgets and add stores only where cazeful financial modeling predicts a maximisation of capital yield. Macy's and Talbots aze just two of the nationals in store-closing mode. Caution will be the by-word for fran- chisees and local retailers. They face diminished availability of funds due to maxed-out home equity, declining home values, and concern over the economy. These factors put potential franchisee and local retailers into a "wait and see" or "exit the mazket" mode. Stingy expan- lion will be the result. By employing defensive leasing strategies, owners will be able to improve cash flow reduced by rising vacancies. Landlords will offer lessee inducements to stem the bleeding: free or reduced rent and extra TI money. After all, a smaller profit is better than a loss. Finally, developers will approach any new project with increased caution. Lease rates have topped out, so there is less profit and more risk of vacancy than in prior years. Developers need to "think outside the big box" to wring their best yield on capital. Creative retail development opportu- nities await developers who broaden their vision beyond purely retail to a mixed use that justifies hi er land prices. We will see more horizontal mixed use projects in 2008, combining retail with apartments,. hotels. or other higher density uses. Distressed land will be another venue forthe developer. Vertical mixed use will prove a new opportunity arising from construction of light and heavy rail corridors. The North- starrail, slated to open in 200.9 wilLhave Retail to page 19 Nancy Frykman PHOTO: COURTESY GENERAL GROWTH PROPERTIES